Should Finisar Be on Your Buy List?

Shares of Finisar (Nasdaq: FNSR) hit a 52-week low on Friday. Let's take a look at how it got there and see if cloudy skies are still in the forecast.

How it got hereTelecom equipment providers haven't exactly hit a rough patch in the past year -- it's been more like quicksand. Just when you think they're done sinking, spending gets reduced or delayed even further. That, in a nutshell, sums up the story behind Finisar and the fiber optic sector.

In Finisar's fourth-quarter report in June, we learned that the spending outlook moving forward hasn't improved much. Spending from U.S. telecom heavyweights Verizon and AT&T was expected to increase after a sluggish fourth quarter in 2011, but has been equally pitiful through the first half of 2012. However, it should be noted that despite Finisar lowering its third-quarter EPS forecast in June below Wall Street's expectations, its CEO, Eitan Gertel, anticipates significant growth in the second half of the year. If you recall, this is exactly what Gary Smith, CEO of optical networking equipment maker Ciena (Nasdaq: CIEN) , also had to say after his company crushed Wall Street's expectations at the end of May.

For plenty of Finisar's peers the second half of 2012 (aka a capital expenditure increase from large telecom companies) can't come quickly enough. Oplink Communications (Nasdaq: OPLK) , JDS Uniphase (Nasdaq: JDSU) , and Tellabs (Nasdaq: TLAB) have all seen earnings estimates heading lower over the past three months.

On the bright side, the rollout of 4G networks is bound to create a data demand surge among small and mid-tier telecom companies and the eventual expansion of Verizon and AT&T's budgets should leave plenty of profits to go around for this mostly well-capitalized grouping.

Smartphone and tablet sales may be booming and the demand for faster download speeds is persistent, but it clearly hasn't translated into bottom-line results for fiber optic equipment providers.

Company

Price/Book

Price/Cash Flow

Forward P/E

Cash/Debt

Finisar

1.5

15.4

15.9

$235 million/$43 million

Ciena

N/M

14.1

28.6

$636 million/$1.44 billion

Oplink Communications

0.9

11.4

15.7

$169 million/$0

JDS Uniphase

1.9

15.1

9

$717 million/$339 million

Tellabs

0.8

N/M

59

$1.16 billion/$223 million

Sources: Morningstar and Yahoo! Finance. N/M = not meaningful.

For the most part, these results are pretty consistent. Outside of Tellabs, which has been losing money, and Ciena, which is the only company to have more debt than cash, this is a healthfully profitable and well-capitalized group of fiber optic companies.

Oplink -- a "small cap to rule them all" pick of mine -- has the healthiest cash position with nearly $9 per share in cash, no debt, and currently trading below book value. JDS Uniphase appears to be inexpensive as well, although its earnings history is filled with many unmet expectations, so forgive me if I'm a bit skeptical of its valuation. Tellabs has been wooing shareholders with its introduction of quarterly dividends and its healthy cash balance, but it'll need Europe to turn around to really be considered a good buy among this group. Overall, Finisar's valuation seems reasonable relative to its peers.

What's nextNow for the $64,000 question: What's next for Finisar? The answer really boils down to when telecom companies start spending again. Small and mid-tier telecoms are really the only thing propping up these fiber optic companies, so when larger orders begin rolling in and Europe stabilizes, there's a ton of upside for networking equipment manufacturers.

"Why not just buy now?" you ask. My primary reasons for waiting are weakness in European spending and no indication from Verizon or AT&T that they plan to spend more in the second half of 2012. Finisar is fundamentally cheap relative to its peers and it's well-capitalized, but if its earnings results continue to falter it could get even cheaper. Over the long term, I feel the continuing build-out of 4G networks will be a growth driver for Finisar, but I'd feel more comfortable owning this closer to $10 than where it's trading at this moment.

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Craving more input on Finisar? Start by adding it to your free and personalized watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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